CEOs are again warning about slower global growth, particularly in Europe and China, and the question is whether this means the stock market is headed for another December-like tumble.
Not so fast. Earnings may not be as bad as many fear.
Federal Express, one of the few companies with a February-ending quarter, has elicited particular concern, as it has lowered guidance for a second time in a row. The Street was well aware of the global economic slowdown and weakness in China, the main issues cited by management. Indeed, Federal Express' stock dropped 30 percent in the fourth quarter to reflect those concerns. It has staged a modest recovery since then but is still down 25 percent from the start of the fourth quarter.
Bulls that had been hopeful that Federal Express would not again lower full year guidance, or that the cut would be modest, were disappointed. The company's guidance for full year earnings was cut about 8 percent in December, and was again cut about 3 percent on Tuesday.
Are we in for a tidal wave of earnings disappointments and even lower guidance when earnings season ramps up in a few weeks?
Maybe, but the odds are against it.
Word of a slowing Europe and China sent analysts into a panic in December and January. They aggressively slashed earnings expectations for the first and second quarter. "They may have gone too far," Nick Raich at Earnings Scout told CNBC.
At the start of the year, first quarter earnings for the S&P 500 were expected to be up 5.3 percent, but by the middle of February the estimates had turned negative. Since then the rate of decline has slowed, and in the last week it has settled. The expectation is that first quarter earnings will be down 1.6 percent, according to data by Refinitiv.
So far, six companies with quarters ending in February have reported, and only FedEx has missed. The other five have all beat, including Autozone, Costco, Adobe, Oracle and Wednesday's report by General Mills.
And of the group, only Adobe and FedEx gave lower than expected guidance.
Most importantly, those six that have reported have beaten estimates by 9.1 percent, Raich said, well above the normal beat rate. And that includes FedEx.
"Consensus earnings estimates were cut so dramatically, it looks like the beat rates will likely be above normal," Raich told CNBC.
In recent years, companies have typically been beating consensus estimates by two to three percentage points. And that could mean earnings for the first quarter will turn positive.
That means that the much-feared "earnings recession," where earnings decline at least two quarters in a row, will likely not happen. Or, at least, it will not happen in the first quarter.
The stock to watch on Wednesday is Micron, which reports earnings after the bell. Like FedEx, the chip company gets significant revenue from China and Europe. Like FedEx, it, too, dropped 30 percent in the fourth quarter on concerns about slower global growth. Like FedEx, it, too, issued guidance below forecasts at that time.
Will Micron follow FedEx and issue weaker than expected guidance?
My bet is that they will, but nothing like December, when first quarter estimates dropped about 30 percent from $2.40 to $1.60. Consensus is now at $1.56. Would another 5 percent to 10 percent cut in estimates drop the stock? Likely yes, but a drop would be more likely in the 5 percent range, rather than 30 percent we saw in the fourth quarter.
Where is the floor in the market? With so much bad news already discounted, the hope among the bulls is that the global economy stabilizes, central banks remain accommodative and further earnings cuts will be modest.